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The Dow's best buys Add to ...

Companies that were cheap before the stock-market correction have become steals during the rout.

Two that stand out are Dow components Chevron and Pfizer . Those mega-caps trade at massive discounts to industry averages and offer fat yields. Although there's still contagion risk from Europe's debt crisis, long-term investors should consider dollar-cost averaging -- buying a set dollar amount at specific intervals.

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Pfizer is the world's largest pharmaceutical company, with a diversified line-up of prescription medicines for people and animals. During the past three years, Pfizer has expanded revenue 4.5 per cent annually, on average, as profit narrowed 25 per cent a year. Pfizer's stock declined 19 per cent a year over the same period.

Quarter: First-quarter profit dropped 26 per cent to $2 billion, or 25 cents a share, as revenue increased 54 per cent. The operating margin fell from 41 per cent to 27 per cent. Pfizer has $17 billion of cash and $46 billion of debt, equal to a quick ratio of 1.2 and a debt-to-equity ratio of 0.5. Its quarterly return on equity declined to 8.8 per cent.

Related contentPfizer

Stock: Pfizer has risen 1 per cent in the past year, less than U.S. indices. It trades at a price-to-projected-earnings ratio of 6.4 and a price-to-book ratio of 1.3, 46 per cent and 67 per cent discounts to peer averages. Its PEG ratio, a measure of value relative to projected growth, of 0.2 reflects an 80 per cent discount to estimated fair value.

Consensus: Of analysts covering Pfizer, 19, or 73 per cent, advise purchasing its shares, five recommend holding and two suggest selling them. Deutsche Bank offers a price target of $25, leaving a potential return of 71 per cent. UBS and JPMorgan predict that the shares will advance another 64 per cent to $24.

Catalyst: Undervalued blue chips currently offer the market's best bets. They are likely to drop less in a sell-off because of relative safety and rise higher in a rally because of relative value. Pfizer's PEG ratio ranks it as the second-cheapest Dow stock. It offers a yield of 4.9 per cent, with a safe payout ratio of 61 per cent. Pfizer recently raised its quarterly dividend from 16 cents to 18 cents.



Chevron is an integrated oil and gas company, ranking behind Exxon Mobil as the second-largest U.S. energy company, based on annual revenue. During the past three years, its sales have slipped 3.1 per cent annually, on average. Its stock has outperformed the Dow since 2007, falling just 11 per cent as the Dow tumbled 27 per cent. Chevron is down 7 per cent in 2010.

Quarter: First-quarter profit more than doubled to $4.6 billion, or $2.27, as revenue grew 35 per cent. The operating margin widened from 6.2 per cent to 15 per cent. Chevron holds $11 billion of cash and $10 billion of debt, translating to a quick ratio of 1.1 and a debt-to-equity ratio of 0.1. Its quarterly return on equity fell to 14 per cent.

Related contentChevron body chart



Stock: Chevron has risen 4 per cent in the past year, trailing U.S. benchmarks. It sells for a price-to-projected-earnings ratio of 7.3 and a price-to-sales ratio of 0.9, 43 per cent and 87 per cent discounts to peer averages. Its PEG ratio of 0.2 ranks lowest among Dow stocks, signaling an 80 per cent discount to estimated fair value.

Consensus: Of researchers following Chevron, 19, or 76 per cent, rate its stock "buy" and six rank it "hold." None rate Chevron "sell." Barclays offers a target of $105, leaving a potential return of 46 per cent. RBC expects the stock to appreciate 39 per cent to $100. Morgan Stanley believes it will climb 35 per cent to $97.

Catalyst: Chevron is among the cheapest Dow stocks and offers a yield of 4 per cent, with a safe payout ratio of 42 per cent. Since the BP disaster April 20, Chevron has tumbled 11 per cent, less than Exxon, ConocoPhillips and Royal Dutch Shell. Its value and yield offer a margin of safety.

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